Historical Motives for Central Banks

Instead of hinting at mysterious social forces, I aim to call them forth; to describe the important private sectors’ public roles and governments’ duties to their electorates, in respect to pushing for changes to central banks. To compare with pre-democratic days, I briefly discuss a few bare bones of the semi-feudal motives for the creation of central banks. Depending on the central bank, sceptics among my interviewees were critical of them, but the more arrogant assumed that central banks should treat the downtrodden as expendable. We were not the citizens of the 1960s. Their friends on Wall Street, the City of London, or the Frankfurt stock exchange were executive traders, who spoke ironically in the language of warlords. They would ‘rip off faces’ of firms or governments waiting to be ‘screwed’. Their surroundings looking over Lake Zurich or the Hudson River were lessons. To stroll (with care) on pot-holed Wall Street down below is to be among the street venders like old times.

About 500 years ago, a handful of these central banks emerged from experimental bargains between sovereign feudal monarchs and the rising bourgeois capitalist classes in Europe. Capitalist money became the core social fact: in general, the motives of both sides were for some sort of public–private or central bank to manage their assets and liabilities to each other: each was mutually dependent. Gradually no one could survive without this money, but only a tiny fraction invented and controlled these deals: aristocratic elites of the rising nation state and new bourgeois class, which between them transformed a feudal economy of kings, nobles and serfs into a capitalist economy and nation states, of labour-capital and significant debtor-creditor money classes. The reader is saved the details of the great literature, since there is only one fundamental point needed to introduce this book. At the time when experimental central banks came into being, there was no democratic involvement in this ‘symbiosis’ of sovereign and merchant moneys that we all use.

In the central bank literature, a common theme is that in the twentieth century, these banks had to cope with ‘the masses’. To some, that complicated central bank work. One cannot stress enough the elitism and disdain entrenched in the dominant central banks, those few that started ages ago. The Bank of England (1694) is a creature of kings and rich merchant-cum-aristocrats. The US Fed, founded in 1913 after a century of political ambivalence and bottom-up debates about money, and two defunct central banks, was created after the ‘gilded age’ by an exclusive state and a handful of ‘robber barons’ and financiers (Rockefeller or J. P. Morgan) in league with Congressional politicians.

Capitalism's violent origins was not the only source of immense global change. Change arose out of the fragmentation of lords and peasants, subsistence activity, person-to-person credit (IOUs) and local coinage. Far-reaching IOU trading systems were developing. Trading merchants funded European/English warlords battling to control territorial patches and, if their centralising aims were unintended, it was this partnership that made state unification and capitalist money possible. Both needed each other, the princes needed funds to fight wars and the merchants to receive ‘royal’ protection. One cannot look at the question of ‘currencies’ and labour ‘markets’, without recognising what state violence achieves. A central currency became imposed with the coercion of taxes only acceptable in that currency, and with (more) violent protection for bank money and its markets.Footnote ⁷

Portugal was probably the first centralising state to ally with merchant-financiers and build heavily armed ships for merchants to collect ‘far away’ precious goods and to arbitrage – that is, to buy cheap and sell dear. These vicious systems, by far the biggest being the Dutch East India Company, were aloof from, but menaced local economies: luxuries went to ‘royal’ courts and to the merchants who funded state war finance and pacification over other warlord-mafia types and their subjected local peoples. Karl Polanyi rejects as fiction the orthodox view that from time immemorial people ‘bartered’ in markets for goods, and later with a ‘handy’ token – money – representing the goods. No: these bills of payment were promises over time. In contrast, the only barter in hunter-gatherer societies was equally long-distant trade that had little to no impact on their ‘embedded’ social structures. These reciprocal ‘spot trades’ between small stateless societies living thousands of miles apart in many cases (in Argentina, Australia, Canada), or feudal or caste hierarchical arrangements prevailed (with subsistence enmeshed in such complex societies), until the ‘great transformation’ around the late eighteenth century. Europe's virulent and dangerous merchant or pirate speculation in the New World, in Russia and India to extract huge concessions, also fatally weakened feudal hierarchical structures in a Europe that was also undergoing chaotic nation building, with the unending desires of princes for loans.

These civil or uncivil capitalist IOUs for distant trade, and nation state debts, often with tally-sticks recording the ‘personal’ sovereign's own debts, involved all kinds of deals with the bourgeoisie or rentiers – those who charged interest (for example hidden in land rents, or rentes in French).Footnote ⁸ Some deals with proto-central banks later proved unstable, such as the Italian city-states (Venice, Medici Florence and Genoa) or Amsterdam. It was only by chance that the English created the capitalist money–state fusion that remains to this day. War finance and protection for money producers seeking profit is one old motive; money for its own sake is the other old motive – but eventually they joined forces uneasily. Their new institution was the central bank.Footnote ⁹

The earliest central banks often started as temporary ‘solutions’ to immediate problems posed by the specific social-cultural tendencies of the time and place, in which certain ideas were part of the prevailing habits and conflicts thrown up. This was the case of the BoE, chartered in 1694. A cash-strapped William III searched for ideas to pay for more wars, one of which was a state lottery. Instead, nearly by chance, the ‘solution’ gave the world capitalist money. Polanyi suggests English central banking ultimately offered protection to business enterprises from the disruptions of a pure market monetary system. The big issue – who is dependent on whom in state-money and bank-money relations – has fluctuated (it's rarely clear). That combination of public debt and private debt was forged after the English Stuart kings defaulted on merchants. William III's Bank Charter, instead, gave the BoE a privileged monopoly position. J. K. Galbraith explains the loan from wealthy creditors of the privately-owned BoE by noting that ‘the government's promise to pay would be the security for a note issue of the same amount’ to private borrowers. Money doubled with this loan, as is evident in bank balance sheets. To Weber, it was an alliance: states would make war and ‘merchant classes’ would make money. The state set up markets in money and ‘free’ labour. The process was fitful, often brutal; it did not follow Dr. Pangloss's optimistic path into a glorious over-determined future.Footnote ¹⁰

A new type of ‘capitalist money’ developed states and economies in revolutionary ways, at times with decent results. How far state violence makes capitalist money possible is incalculable, since the (secretive) strong state is not going away, nor the weak states that are cash-poor and less able to pacify. The strongest early centralising states used the violence of policing powers, branding of counterfeiters and debtors’ prisons, balanced by banks’ political control over debtors like sovereigns who spend, and must tax if inflation or debasement threatens.Footnote ¹¹

Impersonal emotions were built into the institutional ‘deals’ – fear, distrust and self-righteousness on all sides. British governments tried to check the private BoE's abuses of government repayments and profiteering from paper money, with rare success. In Gladstone's view, in 1694, William III had put the state in ‘a position of subserviency … to induce monied men to be lenders’, describing the imbalance as ‘the money power supreme and unquestioned’. Britain's Bank Charter Act of 1844 tried to give the BoE's management of the national currency a quasi-public basis, but defined that as an ‘automatic, technical’ matter rather than a ‘public responsibility’. The BoE's deals with its friends remained hugely profitable. Efforts to put a ‘central’ bank into a role of public trust (that Walter Bagehot preferred) only lasted for a while in the twentieth century, as we see in numerous disputes.Footnote ¹²

Nevertheless, the BoE came to regulate commercial banks with prudential supervision: the last run on a British bank was in 1866 – until Northern Rock in 2007. The BoE ‘deal’ looked attractive. The two sources of money fused, in a way, into one ‘sovereign monetary space’, the public debt of state bonds, and the private debt of bills of exchange. This kernel remains.Footnote ¹³

The BoE is often taken as the universal model, partly because in the nineteenth century, Britain was the pound sterling hegemon, like the US and its dollar in the twentieth century. With the BoE established, and with Britain's land cleared of peasants over centuries, industrial (labour – capital) developments began before Europe, which set up somewhat different CB models. Their aims varied. The BoE combined to prosper with global London merchants (banks) mainly by funding war finance and advancing as ‘loans’ these notes (money) that relied on the Crown's security. Some states directed central banks to other sectoral approaches, such as to industry, which helped labour. Not all peaceful – the French example of Louis XV who was tempted by John Law's BoE model, but with a weak bourgeois class, was a drastic failure – unlike the ultimate bourgeois victors of the English Civil War. The British Crown was on notice to bourgeois Parliament in London, which promoted the City's merchant banks and the BoE.Footnote ¹⁴

The BoE later had control over the dominant world currency, pound sterling, shared with treasury. Meantime the commodification processes (land, labour and money) introduced new relations of money classes, labour-capital classes and their specific stratification systems. These became embedded in global economic activity and countries – affecting all the hinterlands. Polanyi saw the late nineteenth century like this:

By that time, as he said, the British might send gun boats, but that was often less needed when the BoE could pull the thread of gold on a naughty colony or miscreant satrap, or the City of London might refuse to lend. The BoE was ‘the conductor of the orchestra’ (to Keynes) of international capital, currency exchange and global trade in the nineteenth century, which suited UK Treasury-imperial interests and English merchant–commercial classes (the City), but not the UK's industrial classes and county banks.Footnote ¹⁵

The Coming Capitalist Currency Hegemon: the ‘Settler’ USA

The land clearances of peasants in Scotland and England and the complete conquest of Ireland (Cromwell and William III) meant that vast numbers of displaced people sought refuge in, or were transported as convicts to, ‘settler’ colonies in the Americas. The slave trade from Africa became British-dominated in the 1660s (and the BoE was involved commercially).Footnote ¹⁶ Population movements reached their peak during the colonialising nineteenth century. British aristocrats’ improved agricultural arrangements could not compete with the colonies’ eventual output to Europe; keen to preserve their county estate comforts, many married into rich English families of the new capitalist merchant classes.Footnote ¹⁷ On the Continent, class transformations were much slower; the Habsburgs, for example, nurtured their peasants instead of clearing them off their land, to remain available for conscription into huge land armies; Napoleon won over the French peasants (to fight) via land rights. The UK's naval-based war power never required the extensive cannon fodder of Europe.Footnote ¹⁸

A very diverse USA grew out of Europe's colonial carve-up, in the 1600s: an English agricultural economy in the south based on slavery; the French installed a semi-feudalism in Canada and the northern (US) lakes,Footnote ¹⁹ and similarly the Dutch West Indies Company further south-east; as well, aspects of modern finance (trades in stocks, banking) began in a tiny corner of New Amsterdam (Wall Street), whereas religious radicals escaped from persecution to Massachusetts. Trade with the Indigenous peoples ended in ghastly wars everywhere. The displaced of Europe migrated to the USA to be low wage labourers in eastern towns, or small farmers of the ‘Westward Ho’ movement. The US constitution's ‘founding fathers’ – wealthy capitalists, had numerous visions but the ‘united’ states had quite diverse economies, historical and ethnic traditions that hardly matched the visions. For example, Alexander Hamilton, the industrial warrior, took a pro-Wall Street, opposite position to Thomas Jefferson, a Rousseau-leaning small-farm advocate, and personally a slave-owner. Jefferson's argument was that wage labour was a dependency to be avoided in the free ‘new world’, as is evident in the US Constitution's ‘self-evident truths’. Small farmers enacting the free society of independent white men (not a wage labour society, let alone unions), he proposed, would not be totally dependent on a monetary economy, but on mutual aid.Footnote ²⁰

For a long time, (white, male, free) Americans shared Jefferson's money views, and opposed a central bank. Whereas Jefferson said the banking establishment was ‘more to be feared than standing armies’, in contrast, and aiming to copy Continental Europe, Hamilton had pushed for war-finance and industry-promoting remits of an American central bank. His benign view compared to Jefferson's about Wall Street as a centre of ‘the depravities of human nature’, signalled America's long-held ‘ambivalence and chronic culture warfare’ against Wall Street. The tribulations of two different efforts at creating a US central bank in the nineteenth century demonstrated how merchants (sea trade and money) and federalism were tied up in conflicts between agrarian (south and west), manufacturing (north), also, local state versus nation-state building interests. In a nutshell, US farmers and small businesses did not want a central bank or gold standard rule; Wall Street did, and eventually so did Washington DC.Footnote ²¹

American ‘exceptionalism’ neglects the stark problem that during the century after the War of Independence, the USA was financially dependent on the UK. Former US Fed Chair Paul Volcker recently questioned the view of the USA as ‘a huge and relatively self-sufficient country in control of our own destiny’. That view was shaken, for example, in the US ‘first great’ depression of 1837–44, which was a galling experience for Americans after winning independence from Britain. As recounted in Alasdair Roberts’ sensitive history,Footnote ²² it was humiliating the US Administration had so lost ‘credibility’ abroad that it found no lender prepared to fund a war over British-Canadian territory – particularly not the British! In 1837, Treasury was broke, and the ‘union’ was far from perfect. Having engaged heavily in development and/or pork-barrelling, eight states defaulted on British creditors, including New York, which led to self-restrictions on local states borrowing from the City of London. Violence erupted everywhere, that is, not counting the tariff versus free-trade conflicts of the North and South, leading to the Civil War soon after.Footnote ²³ US Treasury had no control of the few income taxes (except briefly in the Civil War) until a 1913 Amendment to the 1787 Constitution, in the same year as the US Fed was founded.

This abbreviated outline of the convoluted disunity in the US points to my argument in Chapter 7, that neither mono or federated monetary unions are so securely united as to blame the problems of today's ECB and Euro model solely on lacking a fiscal union.Footnote ²⁴ Chapter 2, on ‘war finance’, discusses the key aims of the 1913 US Federal Reserve System as it rose to prominence in WWI. Of importance for this chapter is that the well-informed small farm conflicts over money ended, farmers’ sensible desires thwarted, in the ‘gilded age’ (from the 1890s onwards). Top bankers in Wall Street, like J. P. Morgan, straddled industry and banking, and the White House and Congress started to operate in an ‘integrated’ manner with bankers. They moved from lending for production, to consolidating and packaging corporate securities into ‘Trusts’ with huge corporations (General Electric, US Steel and many more).

Democratic participation narrowed. Although President Teddy Roosevelt tried ‘to bust the ‘Trusts’, chances were slim, given J. P. Morgan was globally powerful, having helped to bail out the English Barings Bank that nearly folded in 1890. Furthermore, Congress members took bribes from big business (such as Standard Oil), and connections grew. A Senator and millionaire businessman, Nelson Aldrich, came to play a major role in the founding of the US Federal Reserve in 1913, along with Morgan and other Wall Street bankers. They had so increased their control over the US economy that the former nineteenth-century democratic disputes against a central bank were lost, to a US Fed that was pro-Wall Street and pro-American global ambitions.Footnote ²⁵ And this came to pass in the 1914–18 world war.

Veblen satirised the gilded age. These financier-business men were always disruptive, inefficient and cause of depressions. The latter are a malady of the businessman, and central banks have rarely coped (well) with depressions. The BoE did not decline gracefully (examined in Chapters 2 to 4, also on CBs’ roles in depressions), and it was founded in an entirely undemocratic context; whereas the US Fed came at a time when grass-roots small farm options lost completely. Curious to note, the Fed's ‘elite’ founders met secretly in 1910, hiding from press critics, to design the only other CB like the BoE, to promote Wall Street. Only 60 per cent of Americans had effective voting rights to 1970.Footnote ²⁶

The Australian Money Story

Given its early, varied capitalist phases, America joined late the two most highly urbanised countries with full wage labour systems, in which dependency on jobs, money and state services was total: UK and Australia. Quite civil, often decent US scholars are convinced that the USA had the first ‘Post Industrial’ society in around 1970, but that is 100 years too late. Polanyi and Marx stressed how the English Enclosures created landless, ‘free to starve’ wage labour, also the prerequisite of the Australian agribusiness-labour scheme: post industrial.

The monetary (central bank) story of Australia herein was a surprise for an Australian to find, and I have no wish to advertise its current neo-liberal, indecent political class rule and capital investment strike. Medium-sized Australia never had BoE or US Fed ambitions, yet its unusual capitalist money development is unknown in the central bank literature (or Australia today); rarely mentioned either, are Canada's or India's central banks.Footnote ²⁷ Another excuse for my Australian case study was a vivid 2010 example of the parochialism that always ‘puts the US first’, in some highly influential pro-austerity economists’ work. Americans Carmen Reinhardt and Kenneth Rogoff (R&R) presented debatable statistics on public debt to growth ratios, eagerly grasped by governments from Germany to Britain to justify more austerity.

Their survey of countries’ records during the postwar years excluded Australia, Austria, Belgium, Canada and Denmark. R&R's second focus on selected years, to finger ‘high debt countries’, omitted Australia from 1946–50, New Zealand from 1946–9, Canada from 1946–50, former Dominion countries, from the very years that they – notably NZ – had full employment (FE), low inflation and very high growth.Footnote ²⁸ This is no surprise if, in addition to R&R's ‘threshold’ not existing (countries with low growth tend to have higher public debt from reduced tax intakes), R&R conveniently knock out strong counter-evidence. These former Dominions, with central banks state-owned, had implemented their egalitarian traditions. In those postwar years, their rigorous low inflation: high growth/FE regimes taxed progressively to reduce inflationary trends in public debt. The result was vibrant activity with public debt used for successful long-term development. R&R's research was criticised, but such countries are dreary outliers. Austerity spread as the political fashion du jour, given that the US never truly produced traditions to support social democracy; elites kept union-related labour parties from developing seriously. It is far easier for US orthodoxy to knock out different countries’ decent data.

However indecent it is (again), Australia's early white story is ‘uncluttered’ by white Canada's past feudal peasant relations (Québécois) or slavery-indentured labour (USA). The three countries had fitful, diverse federation processes. All settler countries had Indigenous peoples. Genocide was widespread in all these white invasions, with land stolen everywhere. On a blank-slate capitalist structure but a strong state, Australia's case shows money's perennial instability was experienced as a direct cause of white hardship, which gave rise to public debate and demands that quickly solidified across classes, sectors and political parties, for a well-designed, state-owned central bank that private banks neither wanted nor ever liked. It's a pessimistic story of egalitarian traditions and nation-building states attacked by intransigent capitalist banks. But a legacy survives in the Reserve Bank of Australia (RBA). It had fights with banks and right-wing governments – often to the latter's loss.

Primarily this example shows how cultural-political milieus make certain money decisions possible.Footnote ²⁹ Australia became modern at its 1788 invasion, when Britain established a totally capitalist economy and, briefly, a military convict colony. The state was authoritarian, the UK Governor ruled by decree, but a ruling class (militia officers) formed instantly. Willing free labour was lacking. In common with other sparsely populated, huge land areas that developed to meet European industrial demand for rural products, UK officer-capitalists found that value is never added without labour. The Americas, invaded centuries earlier, used imported serfs and slaves, since (embattled) Indigenous peoples often refused. Argentina coerced peasant indentured labour but with less state monopoly of violence than that deployed in ‘New South Wales’ (NSW), Australia's first British name. Colonising European capitalist empires created markets forcibly.

Being a faraway, late starter (NZ after), Australia consisted in politically similar mixed-migrant colonies marked with disobedience to British domination.Footnote ³⁰ Resistance included mutually destructive, hugely expensive Red Coats’ wars against Indigenous guerrillas;Footnote ³¹ also costly officers’ mutinies against (early) far-sighted UK Governors; and theft of Indigenous (aka Crown) land under UK terra nullius laws. Proto-agribusiness capitalists squatted on land, via primitive accumulation (murder) and capital (via profiteering on selling rum ‘lifted’ from Sydney's UK Commissariat).Footnote ³² They brutalized convict labour (that Governors kept freeing to class relations, small farms and elite jobs). Public-private partnerships (PPPs) began with the UK ‘Rum Corps’ (to sarcastic wits).Footnote ³³ Capitalist money was installed from the outset.

The British had no clear rationale for invasion. Settlement, mainly urban coastal, was connected to state-built roads and railroads, designed to serve vast agribusiness stations in the outback. It proved monstrously costly. Britain ceded political rights to ‘responsible government’ at 1856, long before Ireland.Footnote ³⁴ Having sent out radicals, highly-skilled convicts and ‘assisted’ free settlers, insubordination might have been expected. It was no accident that federation in 1901 created the Commonwealth of Australia with slogans like ‘Mammon or Millennial Eden’.Footnote ³⁵ A unified, modern class-system of high wages (perennial labour shortages, and from wage legislation) and Australia-wide social movements started in no time, especially unions, feminists and chartists. The lack of deference seemed to exhaust Whitehall's Colonial Office and appalled City elites. Britain nearly by accident settled on making money from debtors forced to grovel (London assumed) and large-scale imports, and exports which fluctuated.

Not lawless, it did not have the sizable excluded populations of most settler countries. Military to early democratic authority – of the European and US ‘enlightenment’ – was largely obeyed. Bustling, substantial cities quickly grew, with chartists’ demands met in 1855 and radical (capitalist) presses printing anything that mocked English snobbery, banker and rich squatter lawlessness (theft, murder of Aboriginal peoples) and pretensions to aristocracy.Footnote ³⁶

Most exceptional of the social democracies were demands for state authority, not only for justice in unequal contests over land, life chances, mooted workhouses and indentured labour, but also over money.Footnote ³⁷ UK Treasury tried to control money and banks to suit the City, foolishly, nakedly. The initial convict colony quickly engaged in exports, using expedients like ‘miscellaneous coins, private promissory notes … and bills on London … of the UK Commissariat or missionary societies’, which led to a contrast between anything convertible to ‘sterling’, and the ‘currency’. The latter was not convertible except at a huge price (discount). As in other colonies, the currency became ‘an Australian unit of account’, not English money. In 1822, NSW tried a local currency with a Spanish dollar standard. Whitehall terminated that, contradicting its 1821 promotion of grazier squatters (cheap wool), versus state industries, nation-building Governors and parliaments.Footnote ³⁸

Persistent calls arose for a state-owned central bank: the ‘People's Bank’.Footnote ³⁹ Each Australian colonial state controlled its fiscal and borrowing policies. ‘Plural’ voting for the wealthy was soon banned in favour of one vote, one value in the lower houses; by 1891 women and Aboriginal people voted in one state. That became universal white suffrage in the Commonwealth constitution 1901, after referenda and elite, racist male-chauvinist protests.Footnote ⁴⁰ Each colony owned banks and enterprises and, pre-Commonwealth, competed tirelessly in building railways, grand Town Halls, assisted migration, R&D on (freight) refrigeration, agribusiness productivity and land conservation: on cheap public credit or London advances.Footnote ⁴¹ Australia's history includes (peaceful) conflicts against elites. NZ was perhaps firmer, and Canada even more so, later, although the English excluded French Canadians for some time, and it endured UK and US dependency.Footnote ⁴² The white ‘Dominions’ were open international economies with tiny domestic markets: debtor-capitalist developer countries. NSW's universally despised private bankers relentlessly argued against a state-owned central bank of budding Labor and Town Liberal design, whereas US small-farmer ‘populism’ opposed ‘Wall Street’ and ‘robber barons’, only to lose in the design of the Fed. Australia's story reverses orthodoxy's anti-democracy.Footnote ⁴³

The general nineteenth-century economic problem for settler countries reliant on exports was the gold standard. As Britain slowly gained leadership over this payment system (sterling), nearly all Western Europe benefited, and ‘enjoyed persistently favourable balances of trade’ from investing/lending and colonising overseas with those countries that used systems of ‘holding fluctuating reserves of international currency’. For the latter, such as Argentina, Australia, or the USA to 1900, their ‘volatile balances of trade’ under the gold standard, meant any ‘persistent imbalance was corrected … by modifying interest rates, prices and incomes, to reverse the underlying causes of imbalance’.

These distresses and unemployment occurred in Australia early, given the vast distance and rapid growth of banks, local-owned (the first in 1817) and English-owned. Agribusiness and its city services sector of huge pastoral companies were politically dominant, unlike US small farmers versus Wall Street, but also met huge resistance from an urban civil society with advanced voting rights and trade unions. ‘Circulation of gold coins was not an essential part of the gold standard’, however, whereas freely convertible note issues, or ‘making (national) gold coin an unlimited legal tender’ were preferred practices.Footnote ⁴⁴ Banks in Australia could issue their own notes, as in Canada – and faintly like the Scottish free banking system, and kept reserves (short-term sterling assets) in loans to London.Footnote ⁴⁵ Perennial problems arose from banks’ need to ‘repress the lending enthusiasm’ of their bank branches, the tendency to speculative booms and then withdrawal of lending to agribusiness during busts.Footnote ⁴⁶

Economists show in Australia's microcosm the capitalist patterns of conflict, less like Britain's industrial and service sectors so neglected by City–Treasury–BoE views. Gold was no fetter to banking sectors, save in countries inordinately reliant on overseas demand. Other countries (than the British Empire, with its vast markets of India) moved ahead from 1850 to 1900. What Australia needed was expansionary sterling and local currency (for local industry). Before NSW's and Victoria's gold discoveries (1851), British authorities were intransigent. Cheap food and raw materials were desired but also mobile capital seeks short-term profits, whereas anything involving sunk capital is costly. Each state (as in the USA) invested, specifically in shipping firms; infrastructure; town ports for wool, timber and leather classers; and marketing authorities. Australia was first to develop suburbs (with diverse jobs and coastal views). Skills, good health and their fixed costs give long-term returns. But the fragility of property speculation on infrastructure building (often from illicit insider knowledge of state decisions),Footnote ⁴⁷ share pushing of start-up banks; of new pastoral financial companies and dubious trust firms, often English, suited the City and grazier-squatter interests.Footnote ⁴⁸

In 1825 Britain attempted to ‘impose a sterling exchange standard on the entire British empire’. For NSW, this involved selling Commissariat bills for British silver coins. But British expenditure on NSW was not growing at the pace of demand for imports by the fast-growing NSW private sector. The experiment was abandoned within a decade. The gold discoveries gave Australia slight control over Britain's edicts against monetary expansion.Footnote ⁴⁹

Many players grumbled, mutually irritated, perhaps since Australia was so consistently redistributive and very wealthy. In Australia, cosmopolitan cities and busy presses created a public sphere in which not only the Irish thought of English elites less as enemies, than figures of fun. A somewhat inclusive education gave many Mary Wollstonecraft's feminism and for example Adam Smith saying it was unjust that capitalists marked down labour as a ‘cost’ (not dividends) when labour alone adds value to non-financial assets. More influenced with under-consumption ideas than with Ricardo or Marx insisting ad nauseam that bank money creation was ‘fictitious’ (when it was urgent), multiplier policies became common. Australia has remained in the top three wealthy countries per capita for 200 years with the USA and UK. Minimum wages are still better than in many countries.Footnote ⁵⁰

Before the 1851 gold finds, a bank crash and ‘severe’ depression occurred after a rural export boom that led to a NSW legislative ‘Committee on Monetary Confusion’ (how frank). It proposed a State Bank in 1843. Legislators (squatters and Town Liberals) criticised the ‘avaricious and incompetent’ banker crisis, not as ‘fictitious capital’ but a social fact.Footnote ⁵¹

Everyone volubly loathed banks beyond the usual: In 1851, the high-grade gold fields were ‘an explosive force’ in Australia. For that entire decade, gold replaced wool as the chief export and sparked a battle for a Sydney Mint. The NSW government devised the Mint plan that same year. Arguments in the Sydney Morning Herald (SMH) in 1851 were, first, that a Mint would make the Gold Standard ‘work’, but second, with the rapidly growing population arriving for the gold rushes, a ‘large increase in coin’ was needed for the huge expansion of trade. The SMH warned of ‘monetary chaos’ in California after its 1849 gold discovery.Footnote ⁵²

Whitehall's speedy assent to an ‘unprecedented’ NSW state Mint seemed inexplicable.Footnote ⁵³ The Sydney Mint was to be a branch of the Royal Mint, not to control, and it appears the BoE was not asked, since Treasury (under Gladstone) kept both it and Parliament at ‘arm's length’ over Australia's monetary affairs, to quell (internal) debate. The BoE Governor seemed bemused at Treasury's approval to NSW's owning and running it, saying the Sydney Mint had no merit other than ‘putting a little more money into the hands of the diggers’. One can hear it. NSW would fund the Mint, which implied UK losing control of ‘royal prerogative over coinage’. Another battle over British coins being equal legal tender with Sydney coins was won by NSW, against Whitehall's demand that Sydney's minted coins circulate in the UK and all colonies.Footnote ⁵⁴

Only banks opposed the Sydney Mint plan, to keep their gold dealing. On the goldfields in ‘popular thinking, the local price of raw gold, and the exploitation of diggers by gold-buyers and banks, came to be seen as central points in the mint question’. The Eureka Stockade rebellion at one of Victoria's minefields broke out in 1854 (a rare uprising in Australia's white history), partly for the Mint. And, despite banks’ ‘specious’ arguments against it, exchange rate fluctuations were much reduced once the Sydney Mint started operating in 1855 whereas, since 1788, currency – as notes and coins – and sterling, conflicted.Footnote ⁵⁵

With the Mint, Australia's money supply (bank notes and Sydney coins) expanded to great effect, while Europeans saw the gold influx as sufficient to give up silver (US small farmers did not).Footnote ⁵⁶ Post-gold, English consortiums (usually with aristocrats on the Boards for alleged prestige to the trade in debt) were as keen move into Australian banking businesses as locals. After the UK Treasury's disapproval of various Australian-owned bank charters pre-gold, it ‘rapidly processed’ charters for British banks to get into the gold boom. It marked the London troika's disinterest in declining UK industry, too.Footnote ⁵⁷ Chances for the City and distressed aristocrats were rosier elsewhere - too much so for banking's self-restraint. The number of banks, the branching, and shadow-banks in Australia swelled (to well over Canada's) but ‘gold’ was less a question than bank note issue.Footnote ⁵⁸

This case upends today's naïve monetarist ‘histories’. Social movements turned to governments to correct the excesses of banks and rapacious agribusinesses. Squatters (graziers) used barefaced tactics, ‘socialising their losses and capitalising their gains’ (a typical phrase in muckraking) and profiteered from inside knowledge. A populism of elites supported UK control. Town Liberals, agrarian socialists, even the Country Party, often agreed with the growing Labor Party, which aimed to introduce democracy to the labour market and over the money markets and banks. The horror was bank money inflation, perhaps from Australia's high living standards since 1788. Several credit booms, deflations and depressions were not pinpricks in a life of grinding poverty to Australians (except the Indigenous peoples) but electorally shocking.

So it came to pass, that NSW habitually used effective demand policies and money supply expansion to counter depression from sudden ‘floods/droughts’ of international capital and speculation. (The multiplier, stressing services, operated long before Keynes.)Footnote ⁵⁹ These were purposefully used in a counter-cyclical role as investment ‘engines’ to foster recovery, with programmes of public works on adequate pay rates to reduce hardship and prevent market stagnation. If public policy favoured rural productivity (labour-replacing), boosting export and service sectors for coastal cities’ infrastructure created the jobs and helped factories. NSW tended to lead. Colonial government securities (bonds) were readily available by the 1860s to most private savings banks. Governments also devised their own state-run models of the British post office savings banks (NSW's savings bank in 1832) for a ‘steady flow of funds at low interest’ in securities, and for states’ avid ‘borrowing for the public works’ demanded of a rising population and recurring ‘financial crises’. They spread to other colonies to meet ‘government financial exigencies’ and also made safe ‘savings bank facilities available widely’, with government savings banks by the 1870s ‘sources of loan funds for governments’.Footnote ⁶⁰ Multiplier policies were perhaps a precedent in Australia although not pork barrelling.

Laissez faire myths were publicly implausible. Excesses of mobile capital drowned Australia in the 1880s and parched it in the 1890s; so-called favours to Australia in the 1920s switched to demands that foreign banks’ profitable advances be remitted immediately in 1930.Footnote ⁶¹ NSW Treasury learned caution from its 1876–80 inflation (and contraction), to supervise strictly the massive growth of building societies and land banks.Footnote ⁶² Pompous Victorian banks were indisputably the cause of the major 1880s–90s boom and bust, although miscreants liked to blame Barings’ crash. In global comparisons, this reckless credit boom is to this day called ‘dramatic’.Footnote ⁶³ A Melbourne land and grandiose building boom, over-investment in the pastoral industry; trade and price fluctuations brought a far longer depression in Australia than elsewhere.Footnote ⁶⁴

During this calamitous bust, over half of all Australian deposits were suspended and over 61 per cent of all note issue ceased to be ‘freely negotiable’, but that varied in each colony; New Zealand decided not to join the Commonwealth in consequence. The 1880s’ land boom had ‘disregarded all caution’, blindly assumed rising prices, and ‘crumpled’ with the banks, after a vast expansion of bank branches with low ‘internal control’, fraudulent practices and ‘fringe’ banks. British-owned banks were particularly blithe in their advances, buoyed on a mass of English and Scottish deposits in these banks that paid double the Consol rate. Public derision of the banks’ imposed depression barely lifted. ‘The share capital of some banks bore the scars of their 1890s reconstruction right up to the 1980s, when the Bank of NSW put a final one out of its misery’. Banking policies, furious topics in the labour, liberal ‘protectionist’ and ‘free trade’ agribusiness-socialist movements, left banks cautious for 100 years, although rarely benign politically.Footnote ⁶⁵

Even before NSW Labor joined a quasi-coalition government in 1891, it aimed for a national, state-owned central bank.Footnote ⁶⁶ Of Victoria, Butlin said, ‘the sudden and complete loss of spending power on the business community and on private lives’ in three states, left a long legacy:

In the banks’ reconstruction in Melbourne, when that avoided bankruptcy, imposed creditor or shareholder losses, depositors were paid, at worst, a few pennies in the pound to, at best, seven shillings and six pence, if they withdrew rather than have deposits ‘suspended’, and wait years for mergers or better times. Note issue was no longer freely negotiable. British critics enjoyed castigating Victorian state debts, ignoring profligate (UK) private hysteria, Barings’ collapse and marked differences to older colonies (Quebec was near feudal, India the ancient ‘jewel’). But the pitifully few radical, uncorrupted MPs could not stem 1890s’ Victorian Parliament excesses and ersatz laissez faire bank policies, since MPs were not paid (NSW initiated a MP allowance in 1889). Both Victorian Houses were stacked with bankers and squatters. One State Premier, mired in milking depositors’ funds in the dubious bank he also headed, rushed a Voluntary Liquidation Act through, to prevent his and other Melbourne companies from compulsory liquidation and public court examination. He thereupon appointed himself Agent General in London, to which he ‘fled’. Cartoonists were in hot demand.Footnote ⁶⁸

This scandal of ‘reconstruction’ is worth noting for the GFC fallout and on to Europe (in Chapter 7). And, like 1890s Britain and the USA, the Melbourne public was shocked to find ‘the Elect’, and Anglicans, had committed banking frauds. Ostensibly religious capitalists aimed to squash male workers’ freedoms, and instil virtues of thrift, savings and trust in banks.Footnote ⁶⁹ Calvinist and ‘Temperance’ religiosity did not endure its ‘shameful controversies’ thereafter.

Unlike Victoria, NSW Parliamentary reforms had earlier enabled the Labor Party to stand candidates to voter acclaim. In NSW's distress of 1892, not comparable to Victoria's, NSW Premier Dibbs, allied with Australian Labor Party (ALP) MPs, issued a proclamation to prevent a run that began on the NSW Government Savings Bank, stating that NSW would guarantee that bank's deposits. It did not stop Melbourne banks from dragging down their Sydney ‘connections’ who ‘refused to make bank notes a first charge upon bank assets’. Dibbs declared bank notes legal tender anyway.Footnote ⁷⁰

Modest Models, Somewhat Less Elite

This Black Swan case destroys orthodox efforts to find innocent banks. Australians endured years of bank rackets and foolishness, aided handsomely by ruling elites of agribusiness and politicians with nefarious connections to the City and Whitehall. Britain's designs fooled few. Early political coalitions were fluid; their ‘counter-cyclical’ policies had wide support. The ALP and the unions opposed corruption and, understanding money so well, later aimed to prevent bank money and asset inflation, than provide a lender of last resort (let alone to repeat the 1890s ‘reconstruction’).Footnote ⁷¹ In an 1893 NSW Royal Commission, a national bank proposal wanted all private banks to invest in government securities by law, to be held in reserves, and to nationalise the note issue.Footnote ⁷²

A novel central bank model grew fitfully,Footnote ⁷³ earlier than Canada, NZ and India in the 1930s–40s. These states created distinct CB models too. People's well-being demanded they all gain national monetary sovereignty from the UK or USA: a thankless task. After the 1934 BoC Act, Canada's Liberals declared a rebellion against US Fed functions and BoE war finance; the BoC would not be a ‘banker to the banks’ but to government, although to 1938, it was a private share-ownership (BoE) model.Footnote ⁷⁴ Stricter, given the colossal 1890s’ crash, and older, consensual aims for prevention, Australian Labor wanted a strong, intrusive State-owned central bank to work against banking's pro-cyclical habits of lending aggressively in a boom and contracting harshly in depression. The ALP proposed currency and bank reforms to bring ‘profound social changes to the advantage of workers’. Banks could be generative, but instead proved recalcitrant. From 1901 at federation, before Labor took majority office in 1910, private banks told short-lived Commonwealth governments that under no circumstances would they accept a Canadian system. Canada's Treasury required banks to hold 40 per cent cash reserves in government notes (so lacking in Melbourne's disaster), that may account for Canada's bank stability, given similar bank note issue and lacking a central bank.Footnote ⁷⁵

But Australian banks knew that 1901 federation would entail legislation over banks. Despised, and more concentrated after their 1890s disgrace of reckless note issues, banks wanted government excluded yet feared all politicians; probably why they dared not demand lender of last resort (in a CB), nor dared protest losing their former Note Issue rights.Footnote ⁷⁶ Since they gained ‘more criticism than profit’, banks accepted that federation would involve Treasury commanding their note issues – it was a handy public ‘free loan’ to the Commonwealth. Andrew Fisher's ALP majority government passed a Note Issue Act in 1910. Fisher also engaged in modest (specified) debt financing for public infrastructure, which banks complained ‘treated the note issue reserves as a convenient fund to raid when in need’. To mollify alleged ‘wild experiments in paper money’, in 1911 a cautious state-owned Commonwealth Bank of Australia (CBA) was founded under Fisher (that is, not a central bank but a public competitor to banks).Footnote ⁷⁷ Private banks whinged about the Bank ever after, but states had major tax powers (to 1942) and already owned savings banks for ‘cheap’ loans and securities for public finance. Monetary expansion/contraction already had fruitful remedies.Footnote ⁷⁸

Labor's aim of the ‘People's Bank’ started with a state ‘monopoly’ of banking in 1911, to be gained not by nationalising banks but by founding a competitive (state-owned) trading bank that, Labor alleged, would improve, even drive out private ones. The Bank took two decades to become a central bank despite such old demands, and states’ regular use of the multiplier.Footnote ⁷⁹ Its initial function was to undertake commercial or trading banking and to run the Commonwealth's business. This alone was contentious for capitalist banking interests – their dubious refrain, ad nauseam, was that a non-private yet profitable bank made them face unfair competition. During WWI, the CBA's London branch manager said he faced ‘repugnance’ to the Commonwealth Bank from the ‘monied interests in the City’, and its borrowing from the City was not helped ‘politically’ by UK Labour's keen interest in its state-ownership.Footnote ⁸⁰

In sum, powerful threats and strikes of the major finance centre and currency hegemon of the day always causes difficulties for all countries and are hard to separate from domestic questions. Australia's case, purely capitalist through Britain's invasion and total land theft, with unions able to meet on relatively fair terms with large-scale employers, demonstrates the following. ‘State-capitalist money’ is the primary mover for good or ill, for economic activity or stagnation. Well understood in that context, the Commonwealth state (also NZ's) that democratised quite early had a role in taming this much-needed if critical money.

Eventually, the ‘upstart’ central bank became a stern Commonwealth Government's and banks’ banker to work against deflationary and mostly inflationary tendencies of private banks and states – successfully, yet banks and Anti-Labor political forces fought it bitterly and decades later, mostly won (by 1960). Immense difficulties in many countries, also from the peak money-centres, are explored in Chapters 3 and 4. This case study confirms that even with social forces aiming to tame capitalism peacefully with a democratically controlled central bank, these driving factors rarely survive unchanged.

The logic and social justice that may appear in monetary policy can easily turn into the harsh opposite when state, financial and economic forces combine to reverse them. Control over the production of money is the major conflict that constrains central bank authority over money. Central banks with social justice mandates will mostly end in cognitive and emotional dissonance in balancing policies between the relative strengths of governments and of financial sectors, global and local. Price stability and FE were achieved in many OECD countries in the 1945–70s era, which had never been seen before. That ended by about 1980, although Sweden was the longest standout for everyone able and willing to work. Note also that current employment statistics count as ‘employed’ anyone who laboured for pay for an hour in the reference week. That is not a ‘job’.

Since the logic of the full employment (FE) period is so rarely analysed – not even after the GFC and its further inequalities – a brief discussion is in order. It is a ‘standard’ by which the capacities of central banks, their policies and operations, are assessed in this book. The logic cannot rest on monetary policy alone, but must combine with fiscal policy openly and, above all, broad democratic social support.Footnote ⁸¹ Unpleasant or optimistic situations are therefore the running motif in the book. Far from orthodox ideas of a thing-like economy and of central bank techniques as a slow ‘evolution’, the book takes a different tack. It attempts to look at social contexts of central banks, since the advent of some democratic norms, with this undemocratic, mysterious, quasi-global arena of money creation of states and of financial institutions.

Central Banking's Cognitive and Emotional Dissonances

‘Dissonance’ is another important concept running through the book. I relate it to new democratic processes and to central banks’ typical, recurring functions. These are, in brief, that central banks can easily induce a recession and great hardship on the various inflations thrown up from social or literal (war) conflicts, to the benefit of banks and rentiers, but can rarely specify war financing methods (in Chapter 2); likewise, they perennially find it difficult to control bank money (see Chapter 3). As for getting out of Depression, they cannot do much but ‘reflate’ (to deflate more is disastrous): this refers to their interest rate policies (cheap or dear money). For ameliorating Depressions, CBs can do little but support and combine with the sources needed for FE and social investment, which have only been seen once (see Chapter 4). Later chapters show how that ended in the 1970s when socially-useful private bank money switched to reckless money creation. Chapter 9 worries that if this is uncontrollable with democratic procedures further abused, CBs might best seek the absurd: to do their best under whatever bleak cards they are dealt.

The concept of ‘dissonance’ under FE meant that CBs must avoid inflations, but not deflate into depression. Dissonance arose when they deflated to increase unemployment rates. It is not to claim the 1945–70 era was perfect (!), just to stress FE had never existed before and, after 1975, decent jobs dwindled. However, central bankers now know what is possible and desirable logically and ethically, if impossible for them alone to achieve. In practice, the 1945 FE era did not welcome women – half the population; so, jobless rates excluded ‘discouraged workers’, as women and others were in fact. They didn't count. Given that great leeway for the authorities and employers, and, in many democracies, segmented discriminatory markets of low-paid casual workers, in hindsight it is puzzling that FE created such a backlash – without underlying anti-democratic forces. But thereupon, cognitive and emotional dissonances set in (see Chapter 6).

Second, FE did not end for over determined reasons insisted on by (some) central bank advisers (e.g. the mythical ‘Philips curve’, in Chapter 6, was a tall story) or allegedly shocking wage demands alone. Lacking any designer of harsh policy, old financial patterns reappeared, yet under near irreversible changes (oligopolies; urban life; nuclear war states) and (reversible) precarious democratic processes. Postwar social mobility of male FE, open universal education, pensions, often with security of health systems and cash benefits (neither universal in the USA) were quite contrary to the severe contractions after WWI (see Chapter 2). The 1920 reversion to deflationary austerity, an obliterated public scandal, and banks and central banks imposing further austerity in the deeply depressed early 1930s, even in countries that remained democratic (see Chapter 3), resulted in capitalism's near-collapse and World War II. In the 1940s–50s after such a terrible era, fairer policies tempered money elites’ resentments at so-called upstarts and unions desiring money as well (in Chapter 4) under always-weak democracies. These upstarts were not all white or male. Not that women and blacks ever ran the show, but life-chances slowly improved until the 1970s. FE was thereupon lost and the dual remits of two central banks barely applied, least of all in the Fed: a cognitive or legal dissonance (see Chapter 5).Footnote ⁸² William Greider calls Fed Chair Paul Volcker's drastic contraction starting on 6 October 1979 ‘a behavior modification’ over the entire USA: A ‘pact with the devil’ formed against Democrat President Jimmy Carter (and many others).Footnote ⁸³

Third, policies for FE, minorities, and female majorities are not luxury irrelevancies to central banks, as some assume. Dissonances first arose after normative and practical constraints on bank money were abolished. This is because central banks (and their states) require – in logic, democratic and ethical considerations – FE for peaceful social integration of varied lives and a tangible sense of citizenship; not bank lending to socially useless asset deals. Central banks know but (often) publicly repress how harsh policies give rise to stigma, inability to make ends meet, social disintegration, violence, and costs on trustworthy, state money in rising private debt and crises.Footnote ⁸⁴ Elites grabbed chances to disparage those who desire money to work with pay, security and work-hours of their choice. Meantime, elites claim their ‘rights’ to obsequious workers and servants, to tax minimisation, to unheard-of wealth: illogical for a CB. These coalitions of interest groups perfected the art of whining. Despite forty people searching for each vacancy, abuse of dole bludgers or cadgers became tabloid news and further disgraces everywhere. US policy added to the illiberal meanness of ‘food stamps’. Implementing the vote for blacks caused outrage: US Fed Chair Arthur Burns said he was ‘anguished’ in 1979 (the year new Chair Volcker crushed FE). Really?

Chairing that meeting, the former Chair, McChesney Martin thanked his Fed successor for stressing

Who had a clean conscience? Martin had a social analysis of money whereas Burns resorted to abusing the insecure and jobless he created. By the 1970s many more women were actively seeking work for money; this increased consumer demand and, in downturns, increased formal jobless rates, and more child poverty. ‘Stagflation’ as Burns (or CB historian Curzio Giannini) had it,Footnote ⁸⁶ was a term that in fact combined harsh monetary policy against jobs and wages, with price-wage and asset inflations, to deny those new chances for half the population: women; and also, US blacks who had escaped indentured labour somewhat – black women most precariously. Women also tended to work in the growing service sector; Congress attacks on ‘black mothers’ living (how shabby) on food stamps grew vicious.Footnote ⁸⁷ The service sector still dumbfounds central banks since its productivity cannot be ‘counted’. Pathetic metaphors – like the incidence of what Keynesians called ‘hysteresis’ (note the sexism), meaning skill loss, or the FE term ‘lubrication’, a time for re-skilling for new jobs – were excluded later for the ‘Philips Curve myth’ (see Chapter 6). After being told there was ‘no such thing as society’, this instrumental masking lexicon of ‘hysteresis’ vanished. Instead, recourse to household and consumer debt rose as unemployment rose, inflation dropped as wages declined and unions were crushed: elites would ‘part pay – part lend’ to workers. This entailed illogical, unsustainable household debt.Footnote ⁸⁸ Central banks’ denouement beyond the GFC is in Chapters 8 and 9.

Apart from welcoming young people into the adult world or running the dangers of millions of despairing (indebted) people, FE offers instrumental (logical) advantages to the authorities – now a cognitive dissonance in central banks. Milton Friedman's view of FE is hardly worth debating, save monetarism's 1980s onwards impact on central banks, which mostly insisted (again) money was ‘neutral’.Footnote ⁸⁹ Another idea he quietly dropped after harsh measures succeeded was a negative income proposed during the height of the 1960s–70s US Civil Rights disputes. Nixon nearly got it through (desperate for popularity).Footnote ⁹⁰ States will never give away money already taxed (HPM) to the able-bodied: even decent treasuries need them to work (usefully) for taxable pay. Equally, non-monetarist central bankers rarely touch ‘helicopter money’ (in Chapter 8). This point is lost on the well intentioned who propose a similar ‘basic income’. People do not want ‘sit down’ money, as Indigenous Australians dismiss it, rather a sense of social purpose and shared citizenship.Footnote ⁹¹

Budget deficits always rise when jobs collapse, even in the absence of unemployment benefits (in the USA), because of loss of income tax revenue, and consumer taxes drop from decline in effective demand. Prison expenses have risen sharply, although FE is far cheaper: the US shamelessly locks up a quarter of the world's prisoners.Footnote ⁹² The authorities have logical interests in FE for full wage-labour societies, unlike employers and financial elites, basking conveniently with no dissonance.

Instrumental interests of producers (employers), banks and Treasuries do however exist in renewed generations of consumers, debtors, workers and taxpayers. Mass migration on the cheap (Gastarbeiter from Turkey or Hispanics to the USA and so on) has extra bad faith – disaffection, poverty and divisiveness.Footnote ⁹³ Elites retain a feudal delusion that people will provide a replacement population without modern FE and services. In Great Depressions, of 1930s, and the 1890s when birth control was widely used, populations declined rapidly. There is no hope for children in adults’ futures; in other words, people subsisting on wages-only cannot include parenthood in their lives, and society suffers. The French, on a nakedly pro-natal drive after the huge losses of the 1871 Franco-Prussian war, provided free childcare to unmarried and married mothers, not mere propaganda. Just in time, sadly, for that new generation to become WWI's cannon fodder, and women to give cheap labour until sent home after both world wars. Only Scandinavia followed very soon with childcare. Most rich countries took decades. Corporations need new workforces and consumers; society its continuation.

Inter-generational debates carp illogically against an ageing population less supported by new generations of taxpayer-workers; pro-war, anti-abortion double standards are back. Many elderly comprise women also most in poverty. What do central bankers think? Well, Gary Becker of the Chicago School of Friedman's time sought an economic argument for locking women to unpaid domestic labour and sole caring. He only improved orthodoxy's classing of households as consumption sites, a ‘grazing on kitchen floor’ model, with a ‘small factory’ model. His ‘household utility function’ is incoherent; he relies on a circular line that lower female wages cause women's domestic commitment that create lower wages. It is apologetic. Worse, children are commodities produced in this factory purely as a choice. The ‘Demographic transition’ is ignored: in societies of wage labourers, beloved children are personal financial liabilities and our collective future.Footnote ⁹⁴

With no empirical economic argument to justify female deprivation and submission to ‘century of the child’ moralism (worse for non-white women), the authorities copied Becker (ignoring other economists like Hyman Minsky) in scotching 1970s feminist debates. ‘Money passing hands’ (GDP) and its ‘sound value’ (CPI) versus social security spending, progressive taxes and jobs, are the main (narrow) counted indicators. Unpaid labour has enormous economic value, uncounted, while firms, and lack of pre-school and aged care provisions pass on more tasks; credit raters ignore it. This is not ‘informal cash economic activity’ that evades tax; it is not paid at all, yet it raises living standards and adds value. Double standards abound: grandparents often make parents’ paid work possible, yet they are hounded; the unpaid labour of making a meal nutritious needs purchasing power to buy kitchen fixed capital and fresh produce. Taxes (e.g. VAT) are imposed on people surviving (just, but in housing?), in reciprocal arrangements (maybe) – which reduces effective demand and domestic harmony. The USA is consistently low on UN scores of OECD states’ support, decent wages, housing and health. But this is all in the realm of logic and decent institutions.

Money's Logic with Full Employment

However, to recognise in logic a FE policy of social and democratic integration – jobs, ‘value adding’, decent security, services and regeneration – one can use the ‘taxes drive state money’ argument about High Powered Money (HPM) that the population of able-bodied must be employed taxpayers because they are vital to servicing or retiring state debts and to (financially) supporting their personal dependants not capable of taxable work. Without pensions, low-wage adults are tormented about frail parents’ needs. Central banks (cognitively) measure how elites pass on costs of responsibility for money.Footnote ⁹⁵ One can combine this instrumental logic for FE (i.e. policies to stop CBs’ savage deflations) – fostered via public spending on a high-quality ‘working’ economy – with the fact that banks compete via their privately issued debt to produce money, too: Bank balances are in Tables 1.1 and 1.2. In later CB public talk that avoids how all money is debt (even US Fed Chair Bernanke), crises are allegedly not possible (but befell Bernanke. See Chapter 8). A plausible account knows banks create money, but, like states which tax to service or retire their debts under inflations, healthy economic activity is a must for retiring commercial bank debts too, so that both can ‘serve as money’. This compares ill with contortions of Burns to Bernanke.

In Perry Mehrling's subtle argument that ‘taxes drive money’ but not exclusively, neither state debt nor bank debt is ‘default free’. Money can become unacceptable, non-transferable or untrustworthy in both cases. The payment system can collapse, as in 2008. Why did central banks applaud near money's explosion? The previous Fed Chair, Greenspan, seemed to fear while praising markets (see Chapter 7). Bernanke? He did urge jobs (see Chapter 8), with a monetarism manqué, which entails excluding bank money, yet knew the Fed created money since he did it publicly (under huge pressure) to save banks, as per monetarist ‘histories’ of the Great Depression (in Chapters 3 and 6).

An old term, ‘Real Bills Doctrine’, is defended in Mehrling not because these commercial bank bills are ‘safest’ (see Chapter 3) or, least of all that ‘free banking’ without a central bank is possible because banks are allegedly self-regulating. He argues the Real Bills Doctrine's ‘main truth’ is that some proportionate bank portfolio of such ‘self-liquidating bills’ gives a bank the liabilities that ‘serve as money’. That is, commercial bills are tied to hope that the debts of firms can be serviced and retired with the proceeds from actual economic activity. Schumpeter, similarly, saw its merit versus consumer debt. Thus, the capacity to repay bank debts resembles how state debt also needs to be ‘self-liquidated’ by employed taxpayers.Footnote ⁹⁶ Quality debts then, are about the pattern of payments in public and private that rest on inclusive economic activity – FE for all: not charity (as rich tax evaders assume), instead reliable money we all use.

In the USA, after the 1970s calamities, private debts eventually turned (partially) into securitised loans (such as on NINJA) – later proving unsustainable in banks’ main portfolio, off balance sheet (see Chapter 8). Everywhere banks became ‘egalitarian’ in vulgar form: women could borrow as much as they wanted.Footnote ⁹⁷ In one pitifully rare triumph which improves people's capacity to service, or avoid taking unsustainable debt, Fair Work Australia decided in 2010 to award the community sector workforce a big pay rise. In public debate with orthodox economics, heterodox unionists refuted claims about ‘gender-neutral market institutions’ since they systematically undervalue the services produced mostly by women.Footnote ⁹⁸

So, the logic and ethics of multiple collective actions and beliefs (to Durkheim, ‘social facts’) are always present in demands for improvement. However, what came to pass was the opposite: illogical regression to pre-democratic doctrines. Injustice bred central bank cognitive and emotional dissonances, most of all for or against money as collective desire and need, an institutional social relation between three parties. This became unspeakable: money classes’ indecencies became dominant again. In practice, but rarely sayable since the 1970s, central banks have ever more limited control over ‘the money supply’. Bank novelties create (or restrict) new money, to disrupt the (control) definition of ‘money’ CBs deploy at any one time, as in ‘Goodhart's law’.Footnote ⁹⁹ Employment and useful investment are affected, and speculative behaviour is enhanced.Footnote ¹⁰⁰ Even the massive pressure from employers’ penchant for the lash of hunger is qualified (in logic) by higher profits in FE with its enhanced purchasing power, and the contrasting disaster of debt deflation to active businesses. Banks’ and rentiers’ interests in low economic activity returned, and this now includes corporations tied to financial practices (see Chapter 7). CBs were suddenly divided into hawks and doves or rather, the illogically indecent and the decent clear thinkers.

This introductory sketch shows the growing dissonances in central bank policy – plain logic contradicted in actions, or twinges of conscience about stagnation, newly created jobless and rapid decline of life chances.Footnote ¹⁰¹ Capitalist finance evasions and disruptions, and government war interests (we see) recreated this harsh situation. There was a time when ‘banks were banks’ and thoughtful advances for producers the norm.Footnote ¹⁰² Forget that. Impersonal forms of finance aimed for control (not decent service) that dismantled the central bank of the 1940s–70s era of (limited) democratic and ethical control over money. As evasive financial deals rose, financial hubs – like the old City of London, Tokyo, Zurich, perhaps Paris – became semi-autonomous from their national hinterlands. Wall Street had ups and downs that dominated. CBs transformed under their globalising (militarising) states, as mobile capital re-gathered force. Logic had nothing to do with it and nor, heaven forbid, bank balance sheets.

Central Bank and Bank Balance Sheets

Bank statements do not deceive unless aspects are hidden. Undoubtedly the fact that all money is debt – although not all debt is money, it may be ‘near money’ as in less transferable, or non-negotiable personal IOUs (credit) – has long been frightening; thus, the fiction of the gold standard. Economists like Léon Walras refused to include the basic practice of the deposit-creating loan in ‘theory’, because although he knew it, he thought it ‘immoral’. At much the same time, in 1909 the no-nonsense editor of The Economist, Hartley Withers, outlined an ‘imaginary’ balance sheet to demonstrate the process of manufacturing money, and to show the mutual indebtedness of banks and bank clients. The practice is dependent on mutual trust into the future, mutual responsibility, but shows the fragility of banks. Loans are advances on the back of reserves.

A simplified ‘Bank Balance Sheet’ stylised after Withers (with Schumpeter), as ‘fractional reserves’ is below, in Table 1.1. Banks’ and Bank Clients’ obligations are entered on each side, and the way mutual indebtedness occurs through creating money also appears. The opposite of firms and household balance sheets, which include non-money, unlike banks. In contrast, financial statements always ‘equal’ (double-entry rules), since bank buildings (e.g.) are a tiny fraction of assets (or ‘non-money’). ‘Jamil’ is the ‘saver’ who deposits his wages or windfall. The others are bank borrowers.Footnote ¹⁰³

The bank and the client have mutual obligations into the uncertain future; the downsides are that the borrower may default, or the bank may renege on its promise to clients’ ability to spend freely from their deposits (as in the GFC). Withers uses this over-simplification to show how a bank manufactures money; the scale in large established banks is vast, but the procedure the same for this slice or handful of depositors, and for other banks which also receive proceeds as deposits from loans spent. Withers built on this to show how from notes (and early disasters), cheques were used in his day, whereas today electronic transfers are most common; he then considered the BoE's balances. The procedure is the same – the BoE's clients are other banks and the government.Footnote ¹⁰⁴

In the central bank balance sheet, too, patience is needed to read double-entry bookkeeping, but it cannot be avoided. This is because partisan positions only enable one to unearth clues by comparing their debates; that is, by assessing the logic, norms and evidence of different arguments: unlike balances. Schumpeter's statement about fiscal policy, that ‘the budget is the skeleton of the state stripped of all misleading ideologies’, applies equally to banks and CBs as creators of money.

The ‘skeleton’ in CB statements is found in their interactions with treasuries and with private banks. Their historical statements bring ‘to the realm of sociology’ the social relations of central banks,Footnote ¹⁰⁵ but they cannot show changes over time in any specific asset and liability statement. Since banks hold no non-financial assets to speak of, the two sides in double entry bookkeeping equal zero. So, one can only see money expansion or contraction over a series of statements. The ease with which banks and central banks create money (permitted with state licence, and charter) with advances (loans) entered as both liabilities and assets, is remarkable. In contrast, for firms and households, one can spot a deficit or a surplus in each statement because they have either more, or less liabilities (debts) than income flowing in from employment or non-money assets. Further, in the case of banks, ‘the cost of production of money is a negligible factor in its price’ (it is ‘penmanship’ or, today, keystrokes),Footnote ¹⁰⁶ whereas producing goods or services (hard work) always has a cost more than merely the price of a loan. As well, banks are not money lenders since they do not have money to lend. Shown in double entry, all banks create a loan as both an asset, interest stream into the future, and a liability, deposit to be honoured by banks. Table 1.2 below is a simplified central bank balance sheet, partly drawn on the US Fed method (with far fewer zeros). Balance sheets importantly show what ‘the game’ is.

Licensed private banks need the CB reserves at Liability 1 (L1) as a ‘required’ fraction for them to create more money (or not). Banks use these reserves ‘as cash’. To prevent reckless expansion, there used to be strict bank requirements on holding permitted reserves in the Fed.Footnote ¹⁰⁷ Nevertheless, loans create deposits, and banks are merchants of debt: some economists don't look, others find it so ‘obvious’ they don't mention it.Footnote ¹⁰⁸ L1 bank reserves are usually used to the max, except under quantitative easing (QEs) of 2009–10 (see Chapter 8) when reserves were awash because there was little demand for loans except for speculative asset purchases. The expansion of Wall Street banking's Fed reserves that happened in WWI was also typical (see Chapter 2): their profits come from selling debt (off the fraction in their Fed reserves) and thereby creating money. As a rule, to replenish the deposits in L1, banks must borrow from their CB, so Asset 1 (A1) rises as L1 does. The rate of interest charged on these borrowings is called the Fed Funds Rate in the US, or the CB interest rate. It is meant to control the amount of money that banks can create.Footnote ¹⁰⁹ CBs use a movable ‘target’ in the rate they charge, since central banks routinely ‘accommodate’ private bank demands this way. Despite central bank control over their interest rates, Hartley Withers denied the BoE had control in 1908 ‘over the extent to which its banking customers create credit’, saying that the private banks ruled the BoE.Footnote ¹¹⁰ Hard money people (hawks) exclude these revealing statements, in the sense that a mere look at balance sheets contradicts the innocent role neoclassical economics gives to private banking. The uncivil, in other words, only look at whether Treasury is in debt – that is, creating money, but – again – rarely look at the way central banks cannot avoid monetising state and private bank deficits.Footnote ¹¹¹ It would spoil their story of state profligacy alone, whereby they can depict banks as ‘perfect’.

These discussions of the various motives of governments in establishing a central bank, the pro-finance motives, the war funding or pro-industrial aims, and even desires for social well-being and economic development, are the book's themes. The ways democratic procedures interacted with central bank possibilities and disputes from the twentieth century onward are stressed throughout. One question is whether central banks are comparable to the judiciary, which I argue against. Understanding money-creating processes, in contrast, is essential for assessing central banks: not about typical ‘functions’ but their variations, despite the old money-creating patterns. It arms the argument with further complexities to explore as CBs must shift their sights in larger, usually contested contexts. The first is the earlier (under-examined) major motive of war funding that wrought many unexpected changes in the terrible occasion of WWI, to which I now turn.